As expected, the Federal Reserve decided not to change monetary policy at its meeting. Fed’s signal was mildly dovish and EUR/USD jumped from 1.1900 to 1.1980. Economists at Danske Bank think the dollar dip is transitory and still expect EUR/USD in 1.16 in 12 months.
Key quotes
“In line with our expectation, the FOMC decided to continue to signal no rate hike through 2023.”
“We expect the Fed to start discussing tapering in Q4 21 and actual tapering in Q1 22. We expect a tapering pace of USD20 B per meeting so that QE ends in September 2022.”
“In reading the new forecasts, we see and hear a Fed which is concerned about the pace of jobs recovery although does acknowledge that inflation is in the pipeline and likely well in line with the 2% target. As such, there seems to be little need, if any, to weaken the dollar further by seeking to unwind the mild tightening of real rates.
“We expect more upwards revisions to Fed’s forecast and we expect the market will push in this direction too. Thus, the dip in dollar is likely to be transitory.
“We would change our view on the dollar notably if we see a weaker-than-anticipated recovery in US jobs over the summer. For now, we stick to expecting EUR/USD at 1.16 in 12M.”
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